What’s Behind the Gold Rush?

Shaky financial institutions and fears of inflation make a risky investment hot again.

You can’t eat it. It doesn’t pay interest. It costs money to store, and it’s heavy to carry around.

Yet its price has risen like a rocket over the past 18 months. The cost of a troy ounce jumped more than 70 percent between October 2008 and December 2009, when it topped out at $1,214.80, and this year it has hovered near $1,100. (Gold and precious metals are measured by the “troy ounce,” which is slightly more than an ounce at the grocery store.) On March 30 it traded for $1103.60.

Trade in this ultimate speculative commodity stokes the daily bustle of activity at bullion and rare coin dealers across the country. At the Fort Knox dealership of Alameda, a suburb of Oakland, Calif., the price of gold is a constant source of conversation as a flat-screen TV near the sales counter flashes the latest figures.

“You couldn’t give it away at $700 an ounce, but at $1,200, everybody wants some gold,” said Michael J. Wright II, whose family has operated the business for more than 30 years.

“When the horse is winning, people just want to climb on that horse,” adds his wife, Linda, after weighing a small nugget of dental gold and paying a customer $34 in cash. “It’s psychology and the media,” she adds. “When people get nervous about the economy, or about the future of the banks, they buy gold. They want to have something tangible they can hold on to.”

A Popular Investment in Conservative Circles

In the 24-hour universe of cable television and radio, the pitch seems almost ubiquitous. Tune in to conservative talk-show hosts Michael Savage and Laura Ingraham, or to Fox News commentators Bill O’Reilly and Glenn Beck, and you are likely to be bombarded with pitches about the safety of owning gold, usually in the form of bullion coins.

Ads pushing gold point to the shrinking value of the U.S. dollar against foreign currencies, rising budget deficits and massive government spending as sure signs that gold remains the best investment money can buy.

“When the system eventually collapses, and the government comes with guns and confiscates, you know, everything in your home and all your possessions, and then you fight off the raving mad cannibalistic crowds that Ted Turner talked about, don’t come crying to me,” Beck has said. “I told you: Get gold.”

Critics note that Beck and other gold bugs also appear as paid spokesmen in gold dealers’ ads.

Still, there’s little doubt that the past year’s waves of financial anxiety—triggered by the collapse of Lehman Brothers, the highest unemployment rates in decades, the bankruptcy of two of Detroit’s Big Three automakers, and record federal deficits—have helped drive up gold’s value.

“Business is as busy now as it’s been in the past 20 years,” said John Potts, managing director of Fidelitrade, whose Delaware Depository unit is one of the nation’s largest storage houses for gold bullion and coins.

A Shield Against Inflation?

“People seem very, very fearful of inflation, even though there are no signs of it yet,” Potts said. “Our customers are saying that when you do $3 trillion a year of government spending, inflation has got to be lurking just around the corner. And what’s unusual this time is that people seem less worried about a return on their investment. They just seem to be looking for financial insurance—protection.”

Indeed, anyone who bought gold in December 2008, when the metal was selling for $749 an ounce, is smiling now. Even though prices have declined from their peak, they’re still around $1,100 per ounce.

To skeptics, buying gold seems the equivalent of burying money in your backyard. It doesn’t provide dividends or help create new jobs like investing in a company’s common stock.

And they point out that gold can be a bad bet—especially after a batch of good economic news. On just a single Friday, last Dec. 4, gold fell a stunning $48.60 an ounce after a surprisingly good report on jobs in the U.S. Old-time traders recall the early 1980s, when the price fell from about $850 an ounce to below $300 in the space of 2 1/2 years.

Another cause of concern: declining demand by jewelers. Gold consumption fell 34 percent in the third quarter of 2009 from a year earlier, according to the World Gold Council, an association of gold mining companies. Jewelers, who typically account for about two-thirds of all gold purchases, bought 30 percent less in the quarter—a sign that a rising price of gold can curb jewelry consumers’ appetites.

Indeed, at Fort Knox, the high prices are attracting far more sellers than buyers these days, Linda Wright says. “At prices this high, a lot of folks look into their jewelry cases for the bracelets and necklaces they aren’t wearing any more. For them it’s a good way to earn a little extra cash around the holidays.”

Michael Zielenziger writes about business and the economy. He lives in the San Francisco Bay Area.